For investors in the Nigerian Stock Exchange, May was a month to remember as the Nigerian Stock market closed the month of May with a whopping +10% gain. ARM Explains why this May was different and why the Nigerian Stock Market has the tendency to defy market logic.
- Sell in May and Go Away. At least that’s how the saying goes. However, May 2016 has been one with a difference. The 10%+ rally in the month marks the third strongest gain for the month of May in nearly two decades and this is after a 4.2% cutback in the last two trading days of the month.
- Against such optimism, one might be tempted to think that the macro-picture was no longer relevant. This was the same month in which a negative 0.4% GDP for Q1 16 was announced—the first negative reading in 12 years. Also, a 68% hike in PMS price came into effect with the potential to severely curtail already constrained discretionary incomes, with implications for FMCG companies. This is aside the enduring issues of non-budget implementation, pressured corporate earnings and very compressed fiscal receipts.
- So here’s the picture as we see it: one of the strongest market rallies in a given month is hinged on an MPC that has hinted at flexibility but a week after is yet to give any clues as to how exactly to achieve it; a rebound in oil price that neither impacts the domestic economy nor fiscal receipts; negative GDP that could extend as a result of oil and other issues; and a hike in PMS that government is still scrambling to ensure is not taken as the deregulation we believe the sector really needs. If this is the stuff that a 10%+ market rally is hinged on then investors might need to think again.
- Thus, while it is understandable why some of the previous opportunities may have been foregone, the rapid turn in the month of May reemphasizes that, no matter how poor sentiment is and how pervasive disinterest seems, opportunities will not lay around in perpetuity.
- Whilst we continue to favour the heavyweights in the Banking and Industrial (Cement & Construction) sectors, a couple of names also catch our eye. In the Oil & Gas sector, we feel that Total Nigeria Plc. is best positioned to catch the benefits from the government’s increasing openness to deregulationwhile not at all affected by the pipeline disruptions that taint the upstream players. In addition, we continue to like Flour Mills of Nigeria on valuation grounds and expected resilience against the tough operating environment.